Which statement best describes vega and its relation to implied volatility?

• A. Vega measures the sensitivity of option price to changes in underlying price.
• B. Vega measures the sensitivity of option price to changes in time to maturity.
• C. Vega measures the sensitivity of option price to changes in implied volatility.
• D. Vega measures the probability of early exercise.

Answer: (C)

Vega is the sensitivity of an option’s price to changes in implied volatility. Implied volatility reflects the market’s expected future volatility of the underlying asset, and higher IV increases the option’s extrinsic value because there’s more potential movement to benefit the option holder. So, if implied volatility nudges up by one percentage point, the option’s price is expected to rise by roughly the vega amount (the numeric value of vega). This is true for both calls and puts, and vega tends to be largest for at‑the‑money options with more time to expiration.

The other concepts describe different sensitivities: delta measures how the option price moves with changes in the underlying price, theta measures how the price changes as time passes (time decay), and the probability of early exercise relates to American options rather than sensitivity to volatility.